Fannie Mae, Freddie Mac on the rise amid turmoil

WASHINGTON (MarketWatch) -- Shares of big-mortgage buyers Fannie Mae and Freddie Mac climbed on Tuesday for the second straight session, as investors speculated regulators will let the firms buy more home loans in order to lift the sagging mortgage market.

Spokespeople for Fannie Mae
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Freddie Mac
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and the Office of Federal Housing Enterprise Oversight, or Ofheo, the companies' regulator, did not comment on a Wall Street Journal report that said Fannie officials had asked to have their restrictions relaxed.

The two government-backed institutions, which buy up loans packaged in bulk on the secondary mortgage market, have been forced to hold off boosting their mortgage portfolios because of regulators' lingering concerns about accounting irregularities.

Shares of both companies extended gains on Tuesday, adding to Monday's advances of more than 10% for Fannie and more than 7% for Freddie. At the end of trading on Tuesday, Fannie closed up 3.1% at $64.43, while Freddie's stock climbed 2.7% to $61.64.

Both companies, sometimes known as GSEs or government-sponsored enterprises, would benefit and grow if they were allowed to expand their mortgage-buying activities, said Brian Gardner, a vice president at Keefe, Bruyette & Woods in New York.

"If the GSEs can help out, the mortgage market benefits but the GSEs benefit quite directly," Gardner said in an interview.

"They could have their growth restrictions eased and let their portfolios grow and have their capital restrictions eased," Gardner said. "From an investment standpoint, they look more attractive," he added.

It would be up to Ofheo to let the companies expand their portfolios or securitize more and larger loans.

"It may be appropriate, consistent with safe and sound practices as determined by the regulator, to ease the temporary regulatory cap on Fannie and Freddie's mortgage portfolio," Dodd said in a statement. He said their congressionally mandated mission of making credit available to lower- and middle-income Americans "is particularly important at times like the present when there are contradictions in the flow of mortgage credit."

Doug Duvall, a spokesman at Freddie Mac, declined to comment on any discussions Freddie may or may not be having with regulators. However, he did say Freddie would support any lifting of limits.

"It's a worth idea to lift the constraints that we're currently under so that we can provide greater liquidity to the mortgage market," Duvall said.

But action from Ofheo appears unlikely any time soon, analysts noted. The regulator has consistently opposed allowing the companies to grow their portfolios, said Jaret Seiberg, an analyst with the Stanford Group.

Raising the ceiling on their portfolios "runs contrary to everything that Ofheo director James Lockhart and the Treasury have said for years about the portfolios posing systemic risks to the economy," Seiberg wrote in a research note Tuesday.

Parts of the secondary mortgage market have seized up in recent days as institutional investors become wary of buying packages of riskier home loans. That's a problem for many mortgage originators that rely on the secondary market to sell off the loans they originate and get new cash to offer more mortgages.

Last week, the chief executive of IndyMac Bancorp Inc.
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said that he'd contacted Congress and Fannie and Freddie. Freddie's chairman told him that the organization is "prepared to step up and help the industry."

If Fannie and Freddie specify the exact parts of the mortgage market that are currently unavailable or significantly overpriced for which they would provide financing, the groups could have a "defensible" case for being allowed to expand their portfolios beyond current limits, said Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania.

But the mortgage market is not in meltdown mode, Guttentag argued. Some types of risk "jumbo" mortgages are scarce, he said. (Jumbo home loans are too large to conform to Fannie and Freddie standards). But low-risk jumbo mortgages are still available, Guttentag said.

If Fannie and Freddie ask for permission to invest in all types of jumbo loans, they'll have "no case at all" for getting their limits lifted, Guttentag concluded.

Meanwhile, Impac Mortgage Holdings Inc. said it has stopped funding so-called Alt-A mortgages, but has met all margin calls so far. The company said that it will continue to fund loans that are eligible to be sold to government-sponsored agencies such as Fannie and Freddie. See full story.

Alt-A loans were originally designed for borrowers with clean credit records, but who are allowed, for other reasons, to provide fewer or no documents showing what they earned.

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